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Tax evasion, hell (sometimes) with good intentions

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Early October, publication Pandora Papers Public opinion was once again shocked by the revelation that some of the richest and most powerful people in the world, including top officials, used offshore companies and tax centers to hide their wealth and avoid paying taxes on their components.

Although nothing new, after the revelations of the Panama Papers in 2016 and the Paradise Papers in 2017, the Pandora Papers scandal continues at an unprecedented rate (11.9 million documents and 2.94 TB of data). The revelations prompted the European Union (EU) to make such a declaration New legislative activity To fight against corporate tax evasion.

A more consistent and unified legal framework would undoubtedly help reduce the harmful effects of tax evasion – that is, by definition, the exploitation of legal loopholes between systems, and thus oppose tax evasion – the problem we need to deal with effectively is legal reform?

To answer this question, it is important to understand that there are very different tax deductions. They involve multiple actors (companies, taxpayers, tax advisers, states), but have very different implications from an ethical point of view.

The spirit of the law

A Article In research published in 2014, we identified three forms of tax evasion:

First, the habits ofState Induced Tax Exemption See the methods introduced by a state to achieve the socially and economically desirable goals of a citizen.

These include, for example, tax deductions for donations to charities in the United States (available to individuals and businesses), or tax breaks introduced in the European Union (EU) to promote environmental change. (For example, SuperBonus110 Italy or energy conversion tax credit, CITE, France) for installation of solar panels in homes and other energy upgrades.

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In other words, they are practices that effectively reduce the amount of tax payable in a way that promotes a particular public policy. The decision to reduce Ireland’s national corporation tax from 40% to 12.5% ​​in the late 1990s is a form of state stimulus avoidance, as it aims to stimulate the Irish economy by attracting foreign investment, one of the lowest in the European Union. .

Second form: Strategic tax avoidance, Tax relief includes all systems that have only one of the many dimensions of a transparent and transparent business strategy.

For example, it is the decision of EU companies to outsource customer call centers to low labor cost India. These systems have a strong “financial essence” and are transparent, although in some cases the tax transfer may not be considered in accordance with the intent of the legislature.

At the individual level, we can cite the selection of several professional tennis players, including the current world number one, Serbian Novak Djokovic. Change their residence to Monaco, A country where residents are not subject to personal income tax.

Since professional tennis players travel around the world 40 weeks (work) a year with ease, it is difficult to deny that this decision is transparent and related to the “business model” of the profession (and the beautiful climate and high-quality training facilities in Monaco).

at last, Toxic tax evasion Indicates all plans and adjustments undertaken primarily or exclusively for tax deduction. This tax exemption law takes advantage of literal interpretations of the law, legal loopholes or inconsistencies between national laws, and the use of artificial structures, tactics that do not involve transactions or financial assets, and the determination of transaction prices between hidden or obscure subsidiaries. , Or the creation of imaginary companies (i.e., a company, located in tax centers in general, without significant assets or business activities, acting as a means of tax deduction).

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The legitimacy of these methods is often questioned because they are contrary to the spirit of the law, i.e. the meaning or basic purpose of the legislation. A well-known example of tax evasion is the “Double Irish, Dutch Sandwich” system, which allows shell companies to set up shell companies in Ireland and the Netherlands and transfer their profits to tax havens. To transfer about 20 20 billion in profits to Bermuda in 2017.

This breakdown of the various forms of tax evasion shows that not all systems are equally immoral.

Inadequate control approach

Thus, tax exemption Toxic It is always immoral because it involves forms of fraud, which violates the social contract between business and society, and threatens human rights. The only argument in favor of tax evasion is, in fact, an unethical argument based on a simple view of the business as an “ethical” activity, according to which it is legal and everything is ethical.

On the contrary, the exception State motivation It presents two strong moral arguments: first, it is socially desirable because it is designed to produce socially desirable outcomes; Second, these laws respect the letter and the spirit of the law, as they are explicitly promoted by national law.

However, there is a dark side to this social form of tax evasion: it benefits the richest people in society (rich citizens, strong companies) and thus contributes to increasing social inequality. In addition, the introduction of favorable tax conditions (e.g., lower corporate taxes) could lead to more tax competition between companies and countries.

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Finally, trainings Tactical Tax exemption is a gray area. The fact that these practices are linked to transparency and a good business strategy and all their ethical justifications can be considered to create value for all partners in the company.

However, these strategic approaches raise other concerns. First, the collection of unjustified corporate tax payments by high-income individuals and multinational corporations can reduce the willingness to pay taxes to other taxpayers (entrepreneurs and SMEs), thus undermining the integrity of the country and its tax system. . Second, these practices lead to a change in profits, thereby reducing the tax resources of the country of origin.

Given the complexity of the forms of tax evasion described above, and the multiple ethical questions they raise, and the interference of the roles played by businesses, individuals, and national governments, a regulatory-only approach does not seem to preclude the opening of a new Pandora’s box. In a few years.

We need a multi-stakeholder agreement as we emerge on a sustainable, environmental, social and governance (ESG) standard by establishing sustainable, regulatory frameworks, general principles, communication channels, and an external reporting system. . In other words, we need all stakeholders to recognize that paying taxes is part of their corporate (public, civic) responsibility, not just a legal matter.


Way Simon D. College, Associate Professor, Business Ethics & Strategy, IÉSEG School of Management

The Original version Posted by this article Conversation.